Coming Up Short

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How many railway companies operate in Canada? Hint: more than four. In fact, depending on the year, there are around 60 railway companies in Canada, most of which are small, privately owned railways called short lines.

There is the 132.5-mile long Tshiuetin Rail Transportation Inc. that straddles Labrador and Quebec, tiny Trilliun Railway Co., with its 50 kilometres of track, in Ontario’s Niagara Region, 14 short lines in Saskatchewan, the washed out and currently shut down, 627-mile long line belonging to OmniTRAX’s Hudson Bay Railway Company (HBR)—the list goes on and on.

In 2015, according to a report (Review of Canadian Short Line Funding Needs and Opportunities) prepared for the Railway Association of Canada (RAC) by CPCS Transcom, short lines amounted to 20 per cent of our railway transportation network, by kilometres, accounted for seven per cent of our rail sector revenues, employed 3,000 people directly, and carried over 135 million metric tonnes of freight each year.

RAC president Michael Bourque notes that nearly 20 per cent of all our railway traffic begins on short lines, making them important tributaries that feed freight to our Class 1, a.k.a. mainline railways: CN and CP. The sectors they serve include “… agriculture, forestry, fertilizer, potash, refined petroleum products, automotive manufacturing and the transportation sector,” to quote the testimony of Lee Jebb, vice president, Cando Rail Services, at a June 15, 2017 meeting of the Standing Senate Committee on Agriculture and Forestry.

Short lines shift tonnes of freight from trucks, serve remote areas that the trucking industry would be hard-pressed or unable to reach, and, according to RAC, moving just 10 per cent of freight from trucks to short line railways would reduce GHG emissions by close to 500,000 tonnes—the equivalent of removing more than 3.6 million trucks off the road.

But despite all this, short lines collectively, lead a more-or-less hand-to-mouth existence. CPCS reports that their operating expenses as a share of revenue average about 89 per cent. And since many short lines set up shop on old track that ceased to serve the interests of the mainlines, many are in dire need of expensive infrastructure upgrades. To illustrate, look at their capital expenditures as a percentage of total revenues: By 2013 they rose from consuming most of the revenues, to hitting 117 per cent of total revenues, according to the CPCS report.

Short lines are typically unable to invest beyond basic maintenance and therefore cannot afford the beefed-up infrastructure that would allow them travel more quickly (some are restricted to 10 mph), attract more business, or align their load-carrying capacity with that of the mainlines. Born behind the eight ball, most of them are locked in a losing battle with entropy.

The Great Sandhills Railway operates 123 miles of track west of Swift Current, in Saskatchewan and Alberta.

Short lines and their owners are well respected in the rail industry, and are counted on by their clients. “Our customers include the likes of JRI, Toyota, Magna, Mosaic, PotashCorp of Saskatchewan, Agrium, Resolute Forest Products, Domtar, West Fraser, Imperial Oil, Shell, Federy Co-op, CN and CP, along with many other names that you would recognize,” said Jebb in his 2017 testimony.

“[This] is a very successful sector. Short lines are incredibly entrepreneurial, able to leverage community relationships, and they are not given the credit they are due,” says Michael Gullo, director of policy economics and environmental affairs, RAC. Unfortunately, he notes, “The investments short lines can make are being made to hold the line, with limited ability to grow infrastructure to expand business.”

Some short lines have received government money, such as the Huron Central Railway, HBR (both of which are again in crisis and asking for more), but in general, Canadian short lines have a tough time tapping infrastructure funds. Two provinces—Saskatchewan and Quebec—do have funding programs for short lines. The Short line Railway Sustainability Program (SRSP), a 50-50 cost-shared infrastructure grant program funded by the Saskatchewan Grain Car Corporation and matched by short lines that meet eligibility requirements. In Quebec, a funding program created in 2007 offered up to $30 million for track capacity/speed upgrades, improved safety/efficiency, reduction of greenhouse gases and intermodal projects, but according to the CPCS report, short lines since capital costs were reimbursed upon project completion, like the Central Maine & Quebec (CMQ) were reportedly unable to access funding due to their inability to get commercial financing, despite qualifying for funding.

The federal New Building Canada Fund (BCF) also presents challenges for short lines. At an April 13, 2016 Transport Committee meeting, Frank Butzelaar, president and CEO, Southern Railway of British Columbia, was quoted as saying: “The challenge the short-line railways have is that although investments in short-line railways are eligible for the build Canada fund [sic], you need to have government sponsors. You need to have a government that’s backing the program and is prepared to go in with you on it. As far as I’m aware, no short-line railway has ever been successful in finding government partners for their projects.”

CPCS also noted in its 2015 report, “Only two short line projects were funded under the previous Building Canada Fund (BCF, 2007-2012), equivalent to less than 0.07 per cent of total BCF funding.”

The failure to get stable funding has not been for lack of trying, or for lack of examples elsewhere. The highest-profile recommendation for stable short line funding comes from none other than the 2015 Canada Transportation Act Review (Pathways: Connecting Canada’s Transportation System to the World, Volume 1). David Emerson writes: “Recognizing that short line railways serve an important function in Canada’s national rail network and support resource and manufacturing industries, along with remote communities, the Review recommends:

modifying eligibility criteria for federal infrastructure programs to allow short line railways to apply for funding directly, without a government sponsor;

creating a federal-provincial short line infrastructure program in order to support (through contributions, grants, or low-cost, long-term financing) capital infrastructure investments.”

On whether Bill C-49, at second reading in the Senate as of mid-December 2017, incorporates any of these recommendations, Gullo answers, “No, but the government has launched the Trade and Transportation Corridors Initiative that may benefit short lines. In addition, the new Railway Safety Improvement Program (RSIP) is now accessible to provincial short lines. This was not the case under the Grade Crossing Improvement Program.”

CPCS, in that report it prepared for RAC, recommend that “Transport Canada build in a dedicated short line rail grant component into its existing capital funding program(s) … should be in the amount of $200-$300 million over five years and be accessible to all short lines (including those that are provincially regulated).” And, that “Canada establish a tax credit program for capital investment in short line infrastructure, mirroring the [US] federal Railroad Track Maintenance Tax Credit (45G Tax Credit) program, which includes provisions to assign tax credits to qualified short line shippers and contractors.”

How did this go? “These recommendations have not been adopted, except in making the new RSIP available to provincially regulated short line railways,” Gullo says.

The CMQ railway, born of the bankrupt Montreal Maine & Atlantic short line railway after Fortress Investment Group bought it in May 2014, operates a 481-mile long line—241 miles in Quebec. The MMA track was in such poor shape that for 230 of its miles, trains were restricted to 10 mph—hardly a winning sales pitch to businesses.

With the help of a grant from the U.S. Department of Transportation TIGER Program, which, in 2017, had US$500 million available for infrastructure funding, CMQ invested nearly $30 million in track and infrastructure in its first three fiscal years. The investments have, among other things, allowed CMQ trains to provide faster and more frequent service, match the 286,000-pound maximum per-carload that mainline railways can carry, and exploit new business opportunities.

There are many federal and state funding and tax programs that short lines in the United States can tap, such as that 45G tax credit, which, for instance, permits shippers to use the credit when it invests in short line infrastructure. “We have nothing like this,” Gullo says.

The American Short Line and Regional Railroad Association writes of 45G, “This tax credit helps over 550 short line railroads preserve nearly 50,000 miles of track that otherwise would have been abandoned.” Gullo comments, “It is kind of a shining example of a refundable tax credit.”

Yet according to Ryan Ratledge, president and CEO, CMQ, and an active RAC member in the search for funding solutions, our own federal government is cool to the idea of a tax credit. “As part of our proposal to the federal government, we thought that asking for a tax credit was better than an outright grant. We received feedback from the Feds that we’d be better off asking for an outright grant than a tax credit. As a railway association … we have made proposals as a short line committee as part of RAC, to give the federal government a way to fund—tax credits or outright grants. We have been working with them for two years.”

Meanwhile, short line track continues to deteriorate in what one observer calls a “death spiral” of lessening ability to capture new business opportunities and earn more money to afford track upgrades and get new business.

New safety regulations pull the noose even tighter around the necks of short lines. For example, at that 2016 Transport Committee meeting, Perry Pellerin, chairman, Saskatchewan Short line Railway Association, referenced issues such as the requirement to curb cab noise ($20,000 per locomotive), the need to idle trains ($150,000 more per year in fuel costs), “skyrocketing insurance premiums,” and certain “catastrophic” rate issues.

There are solid arguments for why short lines are just as deserving of government support as any other Canadian freight transportation mode. “There is certainly an education and awareness piece missing, where people do not understand the value of short lines,” Gullo says.